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More restructuring, insolvency cases likely in 2021 as reliefs end

More restructuring, insolvency cases likely in 2021 as reliefs end

Source: Business Times
Article Date: 21 Dec 2020
Author: Angela Tan

Those vulnerable, or facing challenges, will include companies in and related to the oil and marine, retail and construction sectors.

When the novel coronavirus hit Singapore, many companies had to pivot quickly to survive. The journey has been more perilous than expected, and will result in many injured and in need of rescue after government's measures such as debt moratoriums, the Jobs Support Scheme (JSS) and rental rebates expire.

Patrick Ang, managing partner of Rajah & Tann Singapore, told The Business Times there are many potential restructuring and insolvency cases brewing.

"I think more cases will come next year. Banks and other creditors may currently not be taking any legal action as there have been legal moratoriums in place, rental rebates and postponement of rental obligations, assistance for debtors to apply to banks for more time and other assistance. So most people now are given more time," said Mr Ang, who is also vice-chairman of Rajah & Tann Asia.

The Singapore law firm is the highest ranked Asian firm for cross-border restructuring and insolvency, and the only one from Singapore to make it to the top 20 in a widely followed Global Restructuring Review annual ranking for 2020.

Mr Ang was involved in nearly all the restructuring and insolvency cases in Singapore. These include oil trader Hin Leong this year, Lehman Brothers Singapore following the global financial crisis, as well as Sogo Department Store, China Aviation Oil, Asia Pulp & Paper and Swiber Holdings, to name a few.

With most banks holding back for this year, he said, that has given some hope as there is more time to distinguish clearly which companies should be allowed to fail, which should pivot to other business, and which should be saved or aided.

"These are the major exercises that most banks are probably going through now. Once the exercise is done and the stimuli measures start to taper off by the first quarter of next year, my own forecast is that more cases would start appearing," he said.

Those vulnerable, or facing challenges, will include companies in and related to the oil and marine, retail and construction sectors.

He noted that commodity traders caught up in the aftermath of oil trader Hin Leong's shocking collapse are already facing short-term supply disruptions, a rapidly deteriorating credit environment and tighter regulatory oversight.

Banks have also been hit by huge losses in paper trading, leading to even more lending curbs.

This has a ripple effect on Singapore-based brokerages, which have imposed risk limitations on account holders who are traders, stopping physical players from taking new positions.

Oil traders said everyone has to meet their own margins calls, and the only way to do that is to reduce positions. This spells trouble for small traders with over-stretched positions and little cash in hand.

The construction sector is facing a lot of pressure, but primarily because of labour supply - especially in the lower and mid-end jobs which Singaporeans do not want to do.

The demise of Robinsons - one of Singapore's oldest retailers at more than 160 years old - has laid bare the fragility of the retail sector which is struggling to survive the pandemic, and the associated social distancing restrictions. The sector also needs to transform fast enough to survive the digital renaissance.

The property market may experience structural changes due to a wider and regular implementation of increased work from home among employees after the pandemic.

"I think the impact on commercial real estate is anyone's guess - how people will react post-pandemic when their leases come up for renewal. My own guess is that people will rethink their office space requirements because of flexible work arrangements continuing in a limited way. People are more tuned towards work flexibility as part of their lives," Mr Ang said.

If Singapore wants to be a premier restructuring hub, some rules need to be more aligned with commercial realities, he added.

"Some of the SGX Listing Rules may need to be reviewed to be more aligned with commercial realities in the event of an insolvency of a listed company.

"Some were drafted in the context of protecting mainly shareholders' rights and in the context of companies on a going concern basis, with shareholders still having positive equity. And these rules continue to be applied despite companies having a negative equity and not being able to operate as a going concern."

He cited an example, which is always a puzzle for foreign lawyers especially those in the US, where there is a rule called the Absolute Priority Rule - when a company is insolvent and wants to propose something to rescue itself, either by issuing new shares or disposing a major asset. The creditors decide - and that is it. Shareholders have no say.

"But you will notice in Singapore, our Companies Act still requires shareholder approval for the issuing of new shares. It also requires shareholder approval for the disposition of a major asset.

"Because of that, to issue new shares in a restructuring, companies need to ask shareholders with no equity to vote in favour."

This can result in a challenging situation where shareholders with no equity are asked to vote in favour of a rescue plan from which they may not benefit much after creditors are paid.

"But having said that, despite all these - in my whole career - we have not encountered many cases where people are irrational. There have been some negotiations," he said.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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